CAF: A Better Play on China than FXI

With China’s equity markets showing signs of a good long-term bottom being put in place, what is the best vehicle to play this? While I have long considered the FXI to be the best way to play China, it is now obvious that NYSE listed CAF (Morgan Stanley China Share A share Fund) is the better play.

CAF is a non-diversified, closed-end management investment company. The fund is required to invest at least 80% of its assets in A-shares of Chinese companies listed on the Shanghai and Shenzhen Stock Exchange. Because of this, CAF is the better pure play on a new bull market in China than FXI, an ETF with a focus on China securities listed in Hong Kong.

When comparing the action in the respective charts CAF is very close to putting in a nice bottom. Tuesday was the first close above the 200 day average since last May. While stocks and indices coming out of downtrends will typically fail on the first foray above the 200 day average, it is encouraging to see CAF make this initial push through this important technical level.

FXI meanwhile remains 22% below its descending 200 day average. Also the 20 day average is still trading below the 50 day average on the FXI.

A look at the chart on CAF shows some important details (click to enlarge):

Conclusion: While CAF has not hit a true inflection point just yet, it seems as though a good buy point will be coming in the next month or two. Also, it sure seems to be the stronger play on a long-term bottom in China than the FXI, based mainly on the stronger technical signals it has recently flashed.

Look for the 20 day average to move above the 200 day average on CAF as your buy signal in the next few weeks or month or two.

Disclosure: I am not long either FXI or CAF, but plan to be when this technical buy signal takes place.

Comments

[Alan Young:]

Readers unfamiliar with the workings of CEFs may be misled. This is not a "pure play" on the market in China, because it's currently trading at a 19% premium to NAV. That makes it considerably more risky than buying the equivalent ADRs, with most of the risk to the downside.

Mar 12 02:51 AM

[dieuwer:]

One reason NOT to consider CAF is that there are NO options available.

Mar 12 08:28 AM

[willc:]

For investors with access to trading HK stocks, you can try 2828.HK (H-shares index ETF), 2823.HK (FTSE A50 Index ETF) and 2827.HK (China CSI300 ETF). CSI300 is the one to watch as the first futures launched in China will be on this index. For now, liquidity is apparently higher for 2828 than 2823 and 2827, both of which suffer the problem of fluctuating premium or discount due to non-openness of the A-share market.

Mar 13 02:40 AM

[Geoffrey Lordi:]

@ Dieuwer: agreed.

For those complacent about options availability, CAF offers less financial sector exposure than does FXI, as well.

Mar 13 02:41 AM

[terryt:]

Your analysis is purely based on technical signals, but please note that: 1)H shares are trading on huge discount to A shares (in some case 50%). 2)CAF is trading on 20% premium to NAV. If you look at China AH premium index, the A share premium start narrowing now. Last night HSI has massively outperformed Shanghai index. Be careful before you but high (CAF) and sell low(FXI).

Mar 13 09:25 AM

[Retail:]

Can sombody comment on China Tracker? symbol ISMUF.

Mar 13 10:12 AM

[Whitehawk:]

Closed-end funds always take a back seat in my mind to open-end ETFs. They almost always have much less liquidity, and they are leveraged. The yields are usually better as such, but I couldn't find any yields on CAF.

Mar 13 12:16 PM

[searcher:]

Let's see: Shanghai vs. Hong Kong - intra vs. inter - premium vs 'discount' - less vs. greater liquidity - CEF vs. ETF. Um..wait..I'm deciding.

Mar 19 01:03 PM

[johnz:]

CAF is offering stocks, well, guess they can't offer it at a 23% premium which it is trading as closed end fund don't deserve premium due to illiquidity, therefore, they have to rig up the price so that the right issue can be done at an attractive level, so if you buy CAF right now, you are first, throwing away 23 percent right away, second, maybe further discount is wating for you, unless you are working for Morgan Stanley on the placement of this doggy deal, I won't recommend anyone to buy it, in fact, you should short it at this premium level.

Apr 01 12:48 PM